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Supplements » ESG Report October 2021

PRIIPs and SFDR: Plan, Prepare and Partner for 1st July 2022

Sarwal_and_GaddThe volume and complexity of regulatory reporting has increased exponentially since the 2008 financial crisis, causing significant challenges for the wider funds industry. Asset managers face headwinds from a number of quarters; now add to that the deluge of regulatory reporting due to come into force in July 2022. Broadridge Fund Communication Solutions’ chief executive, Arun Sarwal, and chief solutions officer, Paul Poletti-Gadd, explain why asset managers should start to prepare now and why outsourcing regulatory reporting functions makes sense.

On 1 July 2022, two major new regulations are expected to take effect: the Packaged Retail Investment and Insurance-based Products Key Information Document (PRIIPs KID) and the Sustainable Finance Disclosure Regulation (SFDR) Level 2.

The PRIIPs KID transition is perhaps one of the most debated regulations in EU legislative history, leading to a lengthy implementation process. From 1 July, all UCITS Funds or Retail Funds domiciled or sold into an EU jurisdiction will require a PRIIPs KID instead of a UCITS KIID. The new PRIIPs template includes amendments to the presentation of performance scenarios and costs, new calculation methodology for performance scenarios and a modified summary of cost indicators and charges, amongst other things.

After much deliberation, the new PRIIPs Regulatory Technical Standards (RTS) were finalised in September, giving asset managers a mere nine months to prepare. Industry feedback is this is not enough time and there are key concerns around the timing of the two incoming regulations. This flood of new requirements will present serious challenges for firms, who need to find the resource to collate and present the required data, and on regulators, who will need to manage and approve a vast volume of new information.

Then there is the added complication of a post-Brexit UK and EU divergence. The UK Treasury has chosen to implement a five-year delay to the PRIIPs transition, during which time the administrative burden will double-up for some. Cross-border selling will require those offering funds in the UK and the EU to produce both UCITS KIIDs and PRIIPs KIDs to fulfil local jurisdictional requirements.

In addition, some firms are struggling to understand the new methodology and are facing translation issues, trying to fit longer foreign language content into a condensed format.

All of this adds to the lack of certainty and sense of unpreparedness surrounding the two new regulations.

Paul Poletti-Gadd, Chief Solutions Officer of Broadridge Fund Communication Solutions, says: “The key to a smooth transition is to plan, prepare and partner. Managers need to define the scope of their requirements as early as possible to ensure robust templates and good governance. What are their data gaps? How will they source data? Do they need both UCITS and PRIIPs Key Regulatory Documents (KRDs)? How will they distribute the documents and ensure that content is kept up to date?”

SFDR Level 2 – the new normal
The second regulation mooted for a 1 July 2022 launch is SFDR Level 2. Level 1, implemented in March 2021, required asset managers to classify their products into three articles:

  • Article 6: the product may not consider Environmental, Social and Governance (ESG) investing.
  • Article 8: the product has ESG characteristics.
  • Article 9: ESG is included in the product investment objectives.

This information must then be disclosed in fund prospectuses and on corporate websites.

For Level 2, firms will need to:

  • Prove their product classification.
  • Provide a pre-contractual template in the prospectus.
  • Provide a periodic report for each fund and segregated mandate.
  • Produce further website disclosure and entry-level reporting.

There is huge client demand for more information on a more timely basis, even from clients not currently subject to SFDR, such as in Asia. ESG touches on so many parts of an asset manager’s business - from the investment team to portfolio modelling, compliance and the distribution team - the internal burden will be onerous. In addition, judging by templates that have evolved, such as the Solvency II Tripartite Template (TPT) and European MiFID Template (EMT), this is likely to be just one of several iterations.

Poletti-Gadd adds: “Asset managers will be at a clear commercial disadvantage if they don’t get their heads around this. The number of Article 8 and 9 funds will surely grow and where they provide 50 reports this year, it could be 500 next. It is all about consistency, and managers will need to find a system that is not only ready for now, but ready for next”.

There are four key things to consider:

  1. Narrative and evidence: how to maintain consistency and position the data.
  2. Sourcing: who will provide the relevant data and metrics to support the reports.
  3. Computation: how to match the data to the holdings.
  4. Compilation: how to provide scalable and streamlined reports.

To sum up, asset managers will have to to undertake a huge data exercise in the next few months, imposing pressures on already constrained internal resources.

Outsourcing as an enabler
In response to the growing challenges associated with increased regulatory reporting, managers are turning to third party providers such as Broadridge FCS for assistance. “Partnering with a service provider can help ease the pain of regulatory reporting and industry change”, says its Chief Executive, Arun Sarwal. “Freeing up internal resource enables firms to focus on areas that give them a competitive advantage – revenue-generating activities and investment performance, rather than the necessary production and distribution of fund data and regulatory documents to the multiple end points required to support fund sales across Europe.”

Broadridge FCS also closely monitors market and regulatory developments, not only around SFDR and the PRIIPs KID transition, but also more broadly through participation and contribution to industry bodies and regulators. “We have a rolling Road Map for our R&D that is focused on ensuring solutions are available to our clients on a timely basis to meet the regulatory deadlines.”

For service providers, this is their core business, so there is large investment in technology, processes, domain expertise and scalability. This brings with it the potential of sharing mutual efficiencies to result in a win-win partnership.

While outsourcing can be liberating and rewarding, it must be done intelligently. Consider the approaches and strategies available, then be clear and realistic on scope and resource. Success will require effective connectivity and efficient information transfer mapping, empathetic management and rigorous governance. Also consider how regulatory reporting across multiple jurisdictions is not always harmonised or can overlap. An incremental approach over time could result in an asset manager relying on multiple providers across several requirements and markets. This can lead to the duplication of data exchange, increased error rates, process inefficiencies and added costs.

Sarwal adds, “The industry has matured through investment in broadening capabilities, acquisitions and partnering with clients. Today, managers have the opportunity to work with service providers offering a broad range of solutions covering the fund value chain, and with a wide geographic footprint.

“At Broadridge FCS, we continue to build on the strategy to be a one-stop service provider for our clients. Whilst we leverage our decades of industry experience to realise this, we are also open to the idea of working on solutions in partnership with clients. This stimulates innovation, speeds up time to market and also ensures that solutions are closely aligned to industry needs.”

Broadridge Fund Communication Solutions has over 20 years’ experience of fund data, document dissemination and related regulatory reporting. We work with 19 of the top 20 global asset managers*, helping them meet regulatory requirements in an efficient, cost-effective way. Our team are actively engaged in working groups and forums so we can keep our clients abreast of upcoming regulatory changes, and we continuously invest in our platform to ensure clients have access to the latest, most powerful technology, streamlining the reporting processes and safeguarding their data. For more information about our solutions and services, please contact us on +44 07552 625 593 or at [email protected].

All figures correct as at 31.07.2021.

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